Bond yields jump at last Spanish debt auction for the year

Spain was obliged to pay the highest rates in a decade at Thursday auction of 10- and 15-year government bonds just a day after Moody's Investors Service threatened to downgrade the country's credit ratings, citing its exposure to "funding stress."

In its last auction for the year, the Treasury sold 1.782 billion euros in 10-year bonds at a cut-off yield of 5.485 percent. At an auction of paper with the same maturity held a month ago investors were happy to get a yield of 4.632 percent. For the 15-year issue, 618 million euros worth was sold at a marginal yield of 5.986 percent, 1.4 percentage points more than the rate offered at the previous tender in November.

"The auction marks a strong increase in funding costs," Chiara Cremonesi, a fixed-income strategist at UniCredit said.

The rise in borrowing costs was expected after the rise in yields of the two maturities in the secondary market.

The 2.4 billion euros sold for the two issues was at the halfway point of the Treasury's target range of between 2 and 3 billion euros. Demand for the two issues amounted to 4.543 billion euros, about 1.8 times the amount sold.

"It was a good auction," Reuters quoted Cortal Consors analyst Estefanía Ponte as saying. "There was a significant volume of bids." Reuters quoted an unnamed source as saying that about 70 percent of the take-up was by non-resident investors.

Spain's country risk premium was steady at around 250 basis points after the auction having reached a euro-era high of close to 300 basis points in November as fears grew Spain might have to follow Greece and Ireland in seeking assistance from the EU.

Alfredo Saénz, the chief executive of leading Spanish bank Santander said Thursday there was "no risk" of that happening. "We're not in the strong risk zone," he said.

Saénz pointed to the latest measures introduced by the government to convince the markets of its creditworthiness. Spain has embarked on an austerity drive to reduce its budget deficit to 6 percent of GDP from 11.1 percent last year. Prime Minister José Luis Rodríguez Zapatero last week announced privatizations to raise some 14 billion euros. Economy Minister Elena Salgado on Wednesday announced the government was bringing forward plans to make the regions report their budget positions on a quarterly basis.

The auction was held as EU leaders gathered at a summit meeting in Brussels to discuss how best to contain contagion in the euro-zone sovereign debt markets. Spain wants the European rescue fund set up in the wake of the Greek crisis to be allowed to buy bonds in the secondary market, an idea Germany rejects.